Enet obtains draft troika memorandum for Cyprus

Document promises to 'restructure and downsize financial institutions and strengthen supervision'

Public sector and pension reforms, taxation, privatisations and the need to «restore the soundness of the banking system» are at the heart of the policies designed to achieve a 4% of GDP primary balance in 2017. Elsewhere, Cyprus' hydrocarbon reserves come in for special mention

Screengrab from the document Screengrab from the document Eleftherotypia has obtained a draft text of the troika's memorandum for Cyprus.

Entitled "Memorandum of Understanding on Specific Economic Policy Conditionality", the document runs to 24 pages and comes with the proviso "Contains sensitive information, not for further distribution DRP"

Cyprus can expect microscopic supervision and the thorough "restructuring, resolving of financial insitutitions" by its troika lenders, according to the terms of its draft bailout memorandum, which Enet has obtained.

Specifically, the memorandum outlines three programme objectives:

– To restore the soundness of the Cypriot banking sector by thoroughly restructuring, resolving and downsizing financial institutions, strengthening of supervision.

– To to continue the ongoing process of fiscal consolidation in order to correct the excessive general government deficit.

– To implement structural reforms to support competitiveness and sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances. 

Envisaged within the 10bn euro programme is achieving a 4% of GDP primary balance in 2017 (the original troika demand had been 2016) and maintaining at least such a level thereafter and to "correct the excessive general government deficit as soon as possible".

It stresses: "In the event of underperformance of revenues or higher social spending needs due to adverse macroeconomic effects, the government should stand ready to take additional measures to preserve the programme objectives.

A number of revenue-boosting measures have been outlined, including:

– Raising at least €70m from property taxation by amending tax rates and "updating the 1980 prices" by bringing the consumer price index up to date.

– Increasing statutory corporate income tax rate to 12.5%.

– Increasing the tax rate on interest and dividend income to 30%.

– Increase fees for public services by at least 17% of  current values.

Increase standard value added tax from 17% to 18% this year, and to 19% in 2014.

Pensions also come under the spotlight, with the retirement age for public sector employees rising by two years and elsewhere for the minimum age for an unreduced pension going by six months per year. There will also be penalties rendering early retirement "actuarially neutral" and a pension freeze until 2016. Monthly pensions and lump-sum payments will be taxable.

The number of public sector employees will be reduced by at least 5,000 by 2016, and their pay and benefits amended. 

Similarly, at least €1.4bn will be raised through privatisations by the same date, with the Cypriot government expected to supply a list of "assets, including real estate, owned by central government, municipalities and regional administrations, in view of possible divestments or restructurings".  

Tax collection and investigations are expected to become more rigorous and the terms of trusts used to shield funds more onerous, including the divulging of beneficial ownership.

The troika also demands the implementation of "a system of wage indexation commensurate with ensuring a sustainable improvement in the competitiveness of the economy and allowing wage formation to better reflect productivity developments."
In short, Cypriots – just as Greeks have experienced – can expect wage cuts in both the public and private sector.
And finally, as expected, special mention is made of Cyprus' hydrocarbon deposits – indeed it is the only part of the draft memorandum text that is underlined.
Specifically, it says that the programme partners expect to receive:
– A roll-out plan for the infrastructure required for the exploitation of natural gas, taking into account the current large uncertainties and risks in this context. The plan should cover: the required investments, associated costs, financing sources and methods, related major planning risks and bottlenecks; and a projection of the revenue streams over time [first version Q2-2013].
– An outline of the regulatory regime (CERA) and market organisation for the energy sector and gas exports, which would be conducive to the introduction and proper functioning of open, transparent, competitive energy markets.
– A plan to establish the institutional framework for the management of hydrocarbon resources, including a resource fund, which should receive and manage the public revenues from offshore gas exploitation. The preparatory phase should include the required legal steps and their adoption.
Draft troika memorandum for Cyprus

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Memorandum of Understanding on Specific Economic Policy Conditionality - 288 KB